DOW: GOLD RATIO & THE SECULAR BEAR MARKET

As I have been warning investors for many months, stocks have now entered stage III of the secular bear market. Gold on the other hand is now in the final parabolic phase of a 2 1/2 year C wave advance. 

My best guess was that we would see a Dow:gold ratio of between 5-6 before this C wave ended. The ratio was at 5.71 as of today. For reasons explained in the nightly reports I think we may still have a little further to go on the downside for stocks and a little further upside in gold. So it's entirely possible that we could see a Dow gold ratio of 1:5 before the trends reverse.

However the low risk, large potential trade is now in the stock market, not playing chicken with the gold parabola (also explained in the nightly newsletter).

Cyclically the stock market is now in the middle of the timing band for an intermediate bottom. Presumably a sharp bear market rally in stocks will trigger a regression to the mean, profit-taking event in the precious metals market (the D-wave).

D-Wave's almost always test, and sometimes marginally penetrate the 200 day moving average. I've illustrated in the chart above a rough guess as to where I expect the countertrend  rally in stocks and the D-Wave correction in gold to retrace.

Keep in mind that the fundamentals for gold have not changed. A D-Wave is simply a profit-taking event triggered by an unsustainable parabolic rally. It has nothing to do with fundamentals. Once the D-Wave has run its course gold will enter a sharp snapback rally (the A-wave), after which it should consolidate for the remainder of the bear market in stocks.

Stocks on the other hand, after what should be a very convincing bear market rally, will roll over and continue down into a final four year cycle low, probably in the late summer or early fall of 2012. 

Depending on whether or not the Fed tries to fight the cleansing process stocks should either test the March 09 lows, or if Bernanke tries to stop the bear market with another round of quantitative easing, we could see the March 09 lows breached.

Either way I expect that 2012 will go down as one of the worst years in human history. Certainly in the same category as 1932 if not worse.

Gold, the dollar and currency failure

The U.S. Fed and Congress want to see a far weaker dollar against all other currencies but can't see it because of the structure of the currency system! Where does this leave investment in gold?

Author: Julian Phillips

BENONI - 

In the last two weeks we have seen the strongest and most respected currencies being purposely weakened by their own central banks.   It is at times like these, when the going gets tough, that national monetary priorities are fully exposed.   There are major dangers in these policies because of the role that currencies have played since gold was written out of the monetary system in the early seventies.   Then the role of currencies was broadened to include: -

-         Being used to engineer growth or curb growth in national economies.

-         Being used to engineer price stability.

-         Being used to measure the value of assets.

-         Being used to develop a global economy and money system.

WHAT'S GOING WRONG?

These roles conflict with each other!  

The system has worked to date because the world has seen growth from the early 1980's to 2007 and hardly any strain was felt during those years.   But a system is always tested under pressure and pressure we have had since 2007 when the ‘credit crunch' hit hard. 

Like an individual, if a nation has too much debt the value of his financial commitments must fall as his ability to repay comes into question.   If his income drops, then his creditors have cause for worry.    If his potential for increasing that income is undermined by competition then doubts grow as to his future competence.   If he has issued IOU's far and wide and it becomes clear that these may not have the value they were deemed to have, then worries rise about the future of his business.   

Now add to the above that all other businesses rely on his business and behavior for their own success and reputation and one can appreciate the dangers the entire system faces.   If his success and performance are the arbiters of his and all other business's value then one has good reason to question the future and value of the entire monetary system.  

THE SYSTEM'S FOUNDATION

For forty years now the U.S. its economy and its currency have been the bedrock on which the developed world has built itself until today.   Since Nixon cut the link between gold and the dollar, currencies have depended solely on the state of the U.S. and its economy.   Amazingly, in 1971 all the developed world went along with the U.S. and cut their own links with gold, preferring to rely on the U.S. dollar as the final measure of value.   All currencies operated with reference to the dollar and still do, so none can operate independently now.

In times of currency turmoil investors have been inclined to move from the dollar into ‘alternative' currencies whose Balance of Payments was stronger, giving the currency a seeming measure of independence and value.      And this worked, provided the pressures on the dollar and alternative currency were not too heavy.   "Hot money," [the Carry Trade] which allowed investors to borrow cheap and lend at higher interest rates was never so heavy as to threaten the economy of the borrower or the exchange rate of a nation.

The system worked well for forty years and the world grew richer by the day, with development spreading far and wide.   But all was dependent on the dollar, which in turn was dependent on the U.S. economy, which in turn relied on the dollars in the national and global economies.   And today the dollar remains the lifeblood of the world's monetary system.

THE BREAKDOWN OF CURRENCIES AND THE DOLLAR

Even when the pressure started to hit, there was always a refuge currency to run to, to get value, such as the Deutschmark or the Swiss Franc or the Yen.   But then came 2007 and a huge rock was thrown into the pool of calm, growth and stability.   First, the dollar started to sag as its financial excesses began to reap their crop.   The euro became the reference currency for the dollar and looked like it would rise to $1.70 at one point, but it only made it to $1.50 before its own woes became apparent.   The monetary authorities on both sides of the Atlantic then realized that the rate between the euro and the dollar was the fulcrum of the entire currency system worldwide.   This exchange rate had to be kept stable at all costs.   With the banking system needing intensive care on both sides of the Atlantic, floods of newly printed money appeared through quantitative easing, currency swaps and other money creation techniques.   It became clear that despite inflation being apparently contained, dark deflationary forces were at work to balance the money system and again give the appearance of stability.   But everybody realized that currencies were failing in their task of providing measures of value.   The economic, banking and debt catastrophes gave clear evidence that a breakdown was taking place in the monetary and currency system, at first focused on the U.S. dollar, then the euro joined in the fray.

Because of the interdependence of currencies a new phenomenon appeared.   It started with China ‘pegging' its currency to the U.S. dollar at a rate that gave it a huge trade advantage globally, on top of the cheapest skilled wage levels in the world.   But then other nations, realizing the importance of exchange rates in international trade, weakened their currencies in line with the falling value of the dollar.   Those nations that still focused on curbing inflation at home, soon found their exchange rates soaring, destroying their export profitability in the process.  

Again, all seemed to be coping with the new ‘race to the bottom' of the currency value chain.   That is until the latest bout of Eurozone debt crises.   Then the Swiss Franc and the Yen became the ultimate targets for those seeking to hold onto the value of currencies.   The Bank of Japan, already fighting the effects of the tsunami and the Swiss National Bank, saw their currencies rise to the point where their economies were threatened.   They had to follow the rest of the world and debase their currencies, through exchange rate intervention and quantitative easing, which they did.   Yes, they are struggling to do this with the Japanese needing a Yen at 80 to 85 to the dollar [currently at 76.57 to the dollar] and the Swiss needing 0.80 Swiss Francs to $1 [currently at 0.7891].  

THE RESULT

Is there a currency left where one can keep one's wealth?   Is there any one currency that will hold its value against assets, not just in the short-term but for a long, long time?   No, those days have now gone!   The currency system is now incapable of measuring strength or weakness or value through exchange rates, anymore.  

The currency system has been defeated!

Oh, the system is still working.   After all, where else can business and banks go?   But the search for an alternative value retainer was over a long time ago.   Since the turn of the century and since 2005 both gold and silver [two years ahead of the credit crunch] have been reflecting the falling value of currencies.   Perhaps one thought that oil would do the job too, but that ‘spiked' to $145, fell to $35 and then rose again to $100.   Clearly, producers can manage the price of that commodity too.

The concept of value has now been lost almost entirely by paper money, with nothing standing surety behind currencies -which are simply government promises to pay more paper.   Gold and silver have reflected value in the last decade.   It looks so much like they have risen in price astronomically but have they really?   Yes, their markets have grown into global markets and attracted demand never seen before, but every investor has believed that both gold and silver would and will hold value in the future.   From $275 to the current peak of $1,900 is a nearly sevenfold rise and more is expected.   Investors have to ask themselves has gold risen or have currencies fallen?   The answer will pave the way of their success or failure.

WILL GOLD FALL NOW OR RISE FURTHER?

Perhaps we should ask instead, "Will currencies rise now or fall further?"   A glance only, at the problems facing nations, their money and their economies does not inspire confidence.   Instead, we feel a sinking feeling when we look forward.   Is a recession setting in again?   If so, it is on the back of a considerably weakened system no longer able to bear the blows it suffered when the credit crunch first hit.   Are governments able to resolve the developed world debt crises?   Can they make the banking system healthy and  begin lending profusely?   Can economic growth be restored to the point where consumer confidence is resuscitated?   By this we mean, as the employee said to the employer, "if you want confidence back to former levels, where you retrenched one employee, you must employ two more."      

It doesn't look like it does it?   So, is there a good reason why one should get out of the gold and silver markets?

Is there a good reason why they should stop rising?   Have currencies stopped falling?   As you know, our target is $2,090 and we are just about to enter the ‘gold season'.   When we gave you that target, it was the first price at which we expected a consolidation and perhaps a correction.   Then we would look at the picture again and revise our targets.   This does not mean that we believe that is a peak.   We will only know that when we are there.  

In these markets with central banks picking up gold as it appears on the market, the corrections are shallow.   Once demand reappears, it has to push prices up to get the metal.   Any attempt to chase prices too high see emerging market demand evaporate, as we have seen this week.   Then the price pulls back to the level of the last London Fixing, where it pauses before the next move up.   Physical demand remains professional, but robust and happy to see prices rise.   Central banks for one have no illusions about what is happening to currencies.   They see the need to build stocks of gold for themselves.   These are not the actions of speculators but hardened monetary professionals who do appreciate real value.   If they are continuing to buy, what should you be doing?

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=134110&sn=Detail&pid=102055

$75 Silver Looming

By: The Gold Report and David Morgan, Silver-Investor.com

The new normal could be $75/oz. silver. In this exclusive interview with The Gold Report, David Morgan, editor of The Morgan Report, maps out a path for silver that could sink as low as $5/ounce (oz.) during the summer pullback and then bounce up to $75/oz. to establish a new base level. A consistent Silver Institute Production Cost Standard could help investors make smarter decisions during the coming upswing.

The Gold Report: In your Morgan Report, you have written extensively about the impact of global financial issues on gold and silver prices. At least temporary solutions have been found for the euro-Greek tragedy and the U.S. debt limit debacle. Will this give the U.S. dollar a boost at the expense of precious metals? 

David Morgan: It is getting more difficult to predict what the market reaction will be to specific events. As people figure out that there really is no solution to the global financial system without a great deal of pain and some defaults along the road, more will seek the safety of precious metals. So, even when things calm down for the moment, it does not mean the precious metals will not get pushed down. You could see gold and silver react to the downside, perhaps dramatically—$5/ounce (oz.) silver is not entirely out of the realm of possibility. My best guess is we will see some pullback going into mid-August.

TGR: Today, gold hit $1,700/oz. during what is normally a summer slow season. Can this climb continue? What are the drivers?

DM: Yes, it can continue and the driver is uncertainty. Look at all the problems in the currency markets. It seems interbank lending is starting to freeze up in Europe. This was one of the main factors contributing to the financial crisis of 2008. So there is much to consider and it boils down to the fact we are in the final stages of a currency depreciation on a global basis.

TGR: A lot of the economic indicators—GDP and consumer confidence, in particular—are coming in weaker than expected, not to mention the Standard and Poor's downgrade of U.S. debt. Could we see another 2008-style sell-off, and how would that impact precious metals? 

DM: Fundamentally, nothing of substance has changed since 2007 except that the banks have lots of money on hand. You have to understand that the silver market has a mind of its own. What happened in 2008 was a silver sell-off that caused a shortage, pushing the physical price of silver at the retail level to around $13/oz. while paper silver traded under $9/oz. on the futures exchanges. Excessive short selling then ran the price from about the $20/oz. level to the brink of $50/oz. The next leg up could take out the $50/oz. level after a few tries and then not look back until establishing a new nominal level of $65/oz.–$75/oz.

TGR: Where is the demand for silver coming from? Is it industrial or investment-driven? Is the developed or developing world pushing the market?

DM: Look East. In July, the Hong Kong Mercantile Exchange launched a U.S. dollar-denominated silver futures contract. It cited "surging international demand for silver" as the cause for the launch, pointing out that silver demand rose 67% domestically between 2008 and 2010. China accounted for almost 23% of the world's silver usage last year. It is now using four times as much silver per-person as it did 12 years ago, but this is still one-fifth the amount used on a per-person basis in the U.S. and Canada. Silver demand is growing for both industry and as an investment.

The game has changed, however. The physical market is gaining control day-to-day and the bankers are finding it more difficult to persuade the market in their favor. This will only add to the volatility. 

TGR: How will the new Silver Institute standard help investors assess production cost accounting and make smarter investment decisions?

DM: The silver version of the Gold Institute Revised Production Cost Standard is an attempt to create an apples-to-apples yardstick for silver production across the sector. In the past, companies used different metrics to arrive at cost/oz. estimates. Some excluded royalties, while others ignored shipping refining costs. A significant benefit of the new cost standard is that it helps clarify the use of silver equivalent/gold equivalent ounces jargon. About 70% of silver extraction comes as a result of base metals production. But what happens when a company with very little silver on its property decides to report its silver equivalent ounces? Theoretically, the property could be devoid of silver and still use this term by assigning a "silver value" to its base metals. The silver standard should eliminate that practice.

The standard is a general accounting system. So, by definition, it will not fully address all circumstances that producers in the sector might face. For example, a "pure" silver producer with relatively low base metals production in relation to silver ounces will not be able to post a significant base metals figure under the "byproduct credits" entry. And given that the refinement cost of base metals can be substantially higher (up to 40%) than for silver ore, this disparity could work against a given producer when "Total Production Costs" are tallied. Other disparities that might arise can happen when looking at "payable versus produced" ounces, taxation/shipping costs on the export of doré versus silver concentrate, etc.

The standards are also voluntary. Time will only tell how consistently this reporting process will be followed. It was widely embraced on the gold side. Early indications should be evident this fall, when silver producers begin filing their third-quarter financial statements. However, if investors feel it helps them clarify how much profit a silver producer actually makes from its operations, then it is likely to become a de factoyardstick in such matters.

One word of caution. This, or any measurement tool, should never be thought of as a yardstick that will lead to an investment go/no-go decision. Even assuming that this metric gave a totally accurate picture of a company's silver production costs, it would be unwise to "pull the trigger" just because Company A showed a lower production cost than Company B. What if your lowest cost-of-production company gets nationalized? How about the effects of a major mineshaft collapse on production? I'm just saying that the path to high-probability investment decisions depends on a multiplicity of factors, assigning subjective weighting to each, and then accepting a certain level of risk to compensate for unknowns, no matter how the numbers stack up. Therefore, the more factors that jibe, the more likely one is to have arrived at a "profitable" trading consideration.

TGR: Any final thoughts you would like to leave our readers?

DM: Yes, as economic times continue on a path of increasing stress it is a great time for people to reflect upon true wealth. The old adage that the best things in life are free is a bit naïve in my book. Nonetheless, people can reflect upon family, character, health, contribution and all the things that make us human. Perhaps you could do a thought experiment and ask, “What are the 10 things I value the most that do NOT involve money?”

TGR: Thank you for taking the time to share your ideas with our readers.

DM: Thank you.

Source: http://news.silverseek.com/SilverInvestor/1312836395.php

QE3 Is Coming by Year End: Roubini

A third round of quantitative easing by the Federal Reserve is coming by year end, influential economist Nouriel Roubini told CNBC Thursday.

Photo: Oliver Quillia for CNBC.com Nouriel Roubini

"The reality is we’re heading toward recession, and one of the few policy bullets [the Federal Reserve] has left is monetary policy or QE3," Roubini said.

Roubini, also known as "Dr. Doom," puts the chance of a double-dip recession  at 50 percent.

He said whether or not Federal Reserve  head Ben Bernanke announces another round ofquantitative easing  Friday doesn't matter, it will be a reality later this year.

He noted that during the last Federal Open Market Committee  meeting the Fed "discussed wide range of other options if the economy weakens" and further weak data could "be the trigger" for the Fed to take action at its next meeting Sept. 20.

While bad economic data on housing, jobs and home sales suggests a double-dip in the U.S., Ireland, Portugal, Italy and Spain "are already back in recession or never got out of the first one." Data also suggest France and Germany are in “borderline contraction” while the U.K. "has not had any economic growth for three quarters."

He agrees with President Obama that what the U.S. needs in the short term is further fiscal stimulus and medium-term austerity. However, when Obama speaks on Sept. 5 on his job program "he can make any speech he wants, I don’t see any chance of this Congress going to pass whatever he proposes" in an election year when "the worse the economy gets, the more likely Obama is going to lose the election and Republicans will be winning."

He's advising clients to take a "very defensive" approach toward equities and toward commodities.

"It's better to be safe rather than sorry and this year cash is going to be king," he said. "Therefore we would stay away from a wide range of risky assets. Cash gives you zero return but that’s better than losing 20 percent or 30 percent in the stock market. Treasury bonds are at 2 percent, but they could go toward 1 percent in a recession."

Source: http://www.cnbc.com/id/44276918/

Europe on Brink of 'Major Financial Collapse': Guggenheim CIO

Europe is a "train wreck" and on the "brink of a major financial crisis," Scott Minerd, CIO of the fixed-income firm Guggenheim Partners, told CNBC Tuesday.

"The way Europe is operating right now, it's what I called recently 'cognitive dissonance,'" Minerd said, or "basically doing the same thing thinking they're going to get a different outcome."

"They keep throwing more and more liquidity at it thinking it's going to get better and it's not," he added. Europe fails to recognize that it has a "structural problem, not a liquidity problem."

People will "flee the euro" unless they find a way to bifurcate the euro in some way where strong countries are in the euro only and the weak countries are out, Minerd explained, adding, "To be honest with you, I don't see the mechanism to do that."

"As the capital is flooding out of Europe, which we're starting to see now, the first place it's going to go is to the safe havens—[U.S.] Treasurys, which [the market] perceives to be safe, and it'll chase gold," he added.

Compared to a 2 percent return on Treasury notes, investors will eventually say that "stocks with price-earnings multiples of 12 or 13 or 14 look relatively cheap, and the growth for corporate earnings in the United States is very good, and this is likely to help us," said Minerd.

The United States is "the least dirty shirt in the bag," Minerd concluded. "We have a very good chance of seeing equities up maybe another 10 percent [over the next six months] from where we are."

Source: http://www.cnbc.com/id/43988195

Gold Market Update

In the last update, despite being extremely overbought, gold was expected to advance to even higher levels, for various reasons, principally the COT readings and the bullish volume pattern. I gave a target in the $1900 area, and that target was very nearly attained on Friday when gold hit $1881 intraday, before reacting back to close well off its day's highs.

Gold is now monstrously overbought and has finally caught the attention of the mainstream media who are all over it. These factors alone are regarded as making the probability of it reversing soon very high, and if we look at the charts we can see good reasons why it should react back shortly.
On all its short and medium-term oscillators gold is now horrendously overbought. We can see that on our 6-month chart with gold now super critically overbought on its short-term RSI, with it having been critically overbought all this month to date on this indicator. Meanwhile on its more medium-term MACD indicator it is now massively overbought - these conditions being reminiscent of silver late in April. In addition it has opened up a now huge gap with its moving averages.

Although it did not qualify as a bearish shooting star, the candlestick that formed on Friday, with its long upper shadow, is viewed as an indication of exhaustion, or near exhaustion, and thus as a warning. After further consideration of this latest chart it is suspected that an intermediate Head-and-Shoulders top could be forming in gold as shown on the 2-month chart below, with the price possibly having hit the high of the Head of this pattern on Friday, after the Left Shoulder formed earlier in the month, around the 10th. The volume pattern supports this hypothesis, with very high volume going into the Left Shoulder and high but lesser volume on the rally into the suspected Head of the pattern late last week.

When you stop and think about it, it is not unreasonable for gold to top out here and take a rest after after its recent spectacular run. On our 6-year chart below we can see that it has risen to hit a target at the upper return line of its long-term uptrend channel. The bird-brained commentators on the telly are now talking about it a lot, and as we know they have a tendency to do that once something has already risen 500 - 1000% as gold has done after the last 10 years. Actually, they are not as stupid as we may think, as one reason for their huge salaries is that they are paid to drum up a market for Smart Money to sell into, once something has risen a lot.

Gold's COT chart looks about the same as last week, although the Commercial's short positions can be presumed to have risen in recent days (the chart, below, is up to date only as of last Tuesday's [Aug 19th] close).

With gold remaining firmly in a long-term bullmarket, there is thought to be no justification for selling bullion, which could be difficult or impossible to replace later. Instead, holders of bullion may temporarily hedge their positions to preserve gains accrued to date. Traders in the surreal paper gold market can likewise hedge positions or take partial profits on holdings here to sidestep an expected reaction.
One possible reason for gold dropping here would be a sudden unexpected rally in the dollar, as a spinoff from a collapse in the euro occasioned by the deepening crisis in Europe, with further panic funds flowing from plunging stockmarkets temporarily into the dollar and Treasuries, mainly because most investors can't think of anywhere better to park their funds (hint: try bear ETFs).
Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Silver Offers Greater Upside Than Gold: Experts

With gold prices soaring to a record high of $1,910 on Tuesday, some experts are starting to look at silver as an alternative trade, believing it has greater upside than the yellow metal.

"Silver [XAG=  43.01    -0.74  (-1.69%)   ] may come back on," Paul Heffner, CEO of investment managenet firm Gen2 Partners told CNBC on Tuesday. "I think the outside chance of more upside....is actually pretty high, as we see more momentum coming in to alternatives to gold."

Heffner believes silver could rise to as much as $50 an ounce, a 15 percent gain from current levels. That's compared to gains of around 5 percent, if gold[XAU=  1882.30    -14.59  (-0.77%)   ] were to rise to $2000 an ounce, a target cited by several analysts.

Although silver prices collapsed in late April and early May following margin hikes, Gavin Wendt, Senior Resources Analyst at Mine Life thinks the metal is likely to outperform gold over the next 6 months.

"Silver tends to lag the performance of gold," he said. "I think we are at that point now where we are most likely to see some further buying in the silver price, which could well take it up to $50."

Tom Price, Global Commodity Analyst at UBS also has a $50 price target on silver.

"We've got there before, we'll probably get there again," he said. "The markets are very emotional right now, it's not about fundamentals, it's about fear. So we've probably got some upside, just for the same reason gold does."

While gold has outperformed silver in recent months, silver has done much better over the past year, gaining 140 percent, compared to a 50 percent gain for bullion.

According to Daryl Guppy, CEO of Guppytraders.com the charts also indicate that silver has further upside. He believes the metal could reach its previous high of $48.48, which would translate to a 10 percent upside from current levels.

JPMorgan Economist: QE3 Only If We See Deflation, Equities Will Finish 2011 Up 8% To 10%

While global markets have collapsed in recent weeks, erasing more than $5.4 trillion in equity value around the world, market watchers have come out to call for a double-dip recession, with NYU economist Nouriel Roubini leading the charge.  But the economy won’t double-dip, explained J.P. Morgan’s chief economist Anthony Chan, and equities will rebound once risk is re-priced.  The economist also added that Bernanke’s hand will be forced only in the face of a deflationary cycle, making QE3 unlikely.  Chan reaffirmed his view that the S&P 500 will end the year up 8% to 10%.

The Dow has tumbled over 12% since the July 21 peak and is now down almost 5% in 2011.  Global markets collapsed in tandem, with equities in France, Germany, and Italy completely breaking down and gold spiking to fresh all-time highs.  With S&P having downgraded U.S. debt and investors running for the hills, calls for a double-dip and desperate begging for more monetary stimulus have run rampant.

Amid so much chaos, J.P. Morgan chief economist Anthony Chan stuck his neck out, noting “markets are readjusting to a new world, and there’s going to be a little turbulence, but once we adjust and see that this isn’t the end of the world, things will come back to normal.”

As analysts have downgraded their outlook on U.S. GDP, with Goldman Sachs adding a recession is 33% likely, J.P. Morgan sees growth in the coming 12 months at around 2%.  “There are good and bad things coming from 2% growth,” explains Chan, “it means we won’t have a recession, but it does nothing to bring down the unemployment rate.”  Growth needs to be at least 2.75% to begin to bring the unemployment rate down, according to the economist. (Read Goldman Sachs: Recession Is 33% Likely, QE3 Is Coming, GDP Will Grow Only 2%).

Equities will rebound once market participants fully digest the implications of a slow economy and that “it’s not a guarantee that global markets will enter a double-dip,” notes Chan.  Europe is part of the solution, actually.  While European debt woes, with so-called bond vigilantes forcing Spanish and Italian bond yields to spike, have been part of the problem, Chan highlights the European leadership’s commitment “step up to the plate” and do what is needed to avert a more extended downturn.

The ECB has already intervened by expanding its bond buying program, sending yields on Italian and Spanish debt sharply lower.  The EFSF has been expanded and given greater flexibility in order to provide emergency liquidity and stabilize financial markets, and the G7 has affirmed its will to do anything it takes to quell exchange rate volatility.  “I give them credit for taking steps in the right direction,” says Chan, who notes “this may not be the end [of the European crisis], they may still have to take further steps” to stabilize markets, but they seem to have proven that they are willing and capable to step in. (Read Berlusconi Confirms Italy Moving Toward Balanced Budget Amendment).

In terms of policymaking in the U.S., all eyes are now set on Fed Chairman Ben Bernanke and the possibility of QE3.  “We will see the reaffirmation that simulative monetary policy will continue for a protracted amount of time,” explained Chan, but decisive action won’t come from Tuesday’s FOMC meeting. (Read After ECB And G7 Commit To Intervne Markets, Will Bernanke Enact QE3?).

Three factors would force the Fed’s hand and lead to a further round of quantitative easing, the most relevant of which would be a deflationary cycle.  We are actually in a situation where prices continue to rise, according to Chan, so there’s no deflationary concern for the moment.

QE3 could be spiked by a continued, and deep, fall in asset prices, Chan noted.  Many have criticized Bernanke for targetting equity markets, but there does seem to be a connection between rising stock prices, consumption, and capital expenditures.  Quantitative easing appears as a good tool in the face of a deflationary market, but it would face serious trouble in a stagflationary cycle.

Chan’s final condition for QE3 would be a realization that the U.S. economy is entering another recession by FOMC participants.  ”None of these three conditions appear to have been met,” says Chan.

Chan appears as one of the few voices of optimism, albeit a moderate optimism, given market volatility and a generalize collapse that reminds investors of the turbulent days that followed the demise of Lehman Brothers.  With chaos descending into markets, from New York to London to Sao Paulo, Chan stands out as one of the few brave enough and willing to see markets optimistically.

Analysts expect gold prices to repeat 1980 climb

The ongoing bull run in spot gold prices may mimic the climb to dizzying heights seen in 1980 as bullion prices are increasingly becoming emotion drive.

PRLog (Press Release) - Aug 22, 2011 - According to Reuters analyst Wang Toa, the price of spot gold may mirror the rapid climb of 1980 as the metals prices increasingly become emotion driven. 

In 1980, gold shot to $835, completing a bull cycle that began with the metal’s price at at $34.95 in 1970, TW-International understands Wang said.

That cycle was corrective, made of three small waves labeled as "a-b-c", and the wave "c" traveled 4.618 times the length of the wave "a".

"That ratio may repeat under the present scenario, indicating gold could hit about $4,000 over the next few years," Wang went on to say.

But he warned that it was too aggressive to target $4,000 right now, saying he would rather target $2,345 by the end of this year, which is the 261.8 percent Fibonacci projection level of the current wave "C", based on his wave count and a Fibonacci projection analysis.

The wave "C" is made up of five small waves, with the current rally labeled as a wave "V", the final stage of a five-wave cycle, Wang pointed out.
The last stage is commonly the most aggressive rally in a commodities market, as seen in the sharp rise over the past several weeks, he said.

Wang also said that while factors motivating the 1980 rally were strong, including high inflation, Richard Nixon's action to detach the U.S. dollar from gold and Soviet intervention in Afghanistan, the latest run also had significant motivating reasons.

Gold Advances to Record

Gold surged to a record $1,899.40 an ounce as mounting concern that the global economy is slowing amid debt crises spurred demand for bullion as a protection of wealth. Platinum rose to a three-year high.

German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying she won’t let financial markets dictate policy. The Federal Reserve holds its annual symposium in Jackson Hole, Wyoming, this week, amid speculation that it may signal a third round of asset purchases to boost the faltering recovery.

“The sovereign-debt issues remain, and Germany has to decide whether it wants to carry the financial burden of the rest of Europe on its shoulder,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “There are expectations that the Fed may talk about printing more money, and that is positive for gold and negative for the dollar.”

Gold futures for December delivery gained $39.70, or 2.1 percent, to close at $1,891.90 an ounce at 2:05 p.m. on the Comex in New York, the highest settlement ever. The precious metal rose 6.3 percent last week, the most since February 2009. It has advanced 16 percent this month.

‘Remains in Demand’

“Gold is still the safe haven, and as long as people fear recession in the U.S. and euro-zone debt problems, gold remains in demand,” Peter Fertig, the owner of Quantitative Commodity Research Ltd. in Hainburg, Germany, said by telephone. More U.S. asset purchases “would be bullish for gold,” he said.

The dollar has declined 6.3 percent against a basket of six currencies this year. Gold is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify their holdings away from equities and some currencies. Global stocks earlier this month slipped to an 11-month low, and bullion reached all-time highs today in euros, British pounds and Swiss francs.

The metal has gained 33 percent this year. The MSCI All- Country World Index fell 12 percent, the Standard & Poor’s GSCI Index of 24 commodities rose 2.4 percent, while Treasuries returned 7.7 percent, a Bank of America Merrill Lynch index showed.

Quantitative Easing

The Fed bought $600 billion in Treasuries from November through June in a second round of so-called quantitative easing, or QE2. The central bank said Aug. 9 that U.S. economic growth was “considerably slower” than anticipated and it’s ready to use a range of policy tools to boost the economy. The Fed pledged to keep interest rates near zero at least until mid-2013.

Silver futures for December delivery in New York gained 89.8 cents, or 2.1 percent, to close at $43.365 an ounce on the Comex. Earlier, it jumped to $44.10, the highest since May 3.

Platinum futures for October delivery advanced $30.80, or 1.6 percent, to $1,905.70 an ounce on the New York Mercantile Exchange, after touching $1,909.90, the highest since July 17, 2008. The metal gained for the 11th straight session, the longest rally since October 2007.

Palladium futures for September delivery rose $16.30, or 2.2 percent, to $765.10 an ounce on the Nymex.

Source: http://www.bloomberg.com/news/2011-08-22/gold-advances-to-record-as-platinum-reaches-high.html